"The consultations resulted in full understandings over all points of discussions, including setting up an interim agreement with specific tasks and to set a date for election," Egyptian intelligence said in a statement on Wednesday.

"The two sides signed initial letters on an agreement. All points of differences have been overcome," Taher Al-Nono, a Hamas government spokesman in Gaza, told the Reuters news agency.

He said that Cairo would shortly invite both sides to a signing ceremony.

Speaking to Al Jazeera from Gaza, Ghazi Hamad, a senior Hamas official, said: "I think we are optimistic because ... there is [an] official agreement between Hamas and Fatah, and I think we now have [an] impressive jump to the Palestinian unity.

"Maybe it does not come as a shock because I think it came as a fruit of long talks and discussion.

"I think that today we became very close to this agreement, we have finished some points. It is like [an] outline draft and I think it will be a good beginning.

"Maybe after that we will start on how to implement this agreement to be translated and practised on the ground."

'Geopolitical situation'

Marwan Bishara, Al Jazeera's senior political analyst, said: "It is important news ... the geopolitical situation wasn't exactly helpful [to reconciliation] and then we went through six months of upheavals, certainly sweeping through Egypt.

"At the end, you could say that President Abbas has lost his patron in Egypt, which is President Mubarak, and Hamas is more on less facing almost similar trouble now, with Bashar al-Assad [Syria's president] facing his own trouble in Damascus.

Saree Makdisi, a Palestinian scholar at the University of California, discusses Fatah-Hamas reconciliation accord

"So with the US keeping a distance and Israel not delivering the goods on the peace process and the settlements, it was time for Palestinians to come together and agree on what they basically agreed on almost a year and a half ago."

Binyamin Netanyahu, Israel's prime minister, said on Wednesday that Abbas could not hope to forge a peace deal with Israel if he pursued a reconciliation accord with Hamas.

"The Palestinian Authority must choose either peace with Israel or peace with Hamas. There is no possibility for peace with both," he said.

In his televised statement, Netanyahu said Israel could not accept Hamas as a negotiating partner because it "aspires to destroy Israel, it says so publicly, it fires rockets on our cities, it fires anti-tank rockets on our children."

He said that the surprise announcement of a reconciliation deal "exposes the Palestinian Authority's weakness".

And on Thursday, Avigdor Lieberman, the Israeli foreign minister said the deal marks the "crossing of a red line".

Lieberman warned that the accord could lead to the militant group's takeover of the Fatah-run West Bank.

But top Abbas aide Nabil Abu Rdaineh said the reconciliation did not concern Israel.

"The agreement between Fatah and Hamas movements is an internal affair and has nothing to do with Israel. Netanyahu must choose between a just peace with the united Palestinian people ... and settlements," Abu Rdaineh said.

Al Jazeera's Sherine Tadros reported from Ramallah that "a lot of people would say that this was really an empty kind of ultimatum - what peace process, or what peace deal, is prime minister Netanyahu actually talking about?

"The peace process very much took a hit in the last few months. There has been no peace process taking place between the Palestinian Authority and Israel because of Israel's insistence on building on land that is being negotiated on.

"So I think many months back, the PA and Fatah decided to take their own route, away from this peace process, away from US mediation and try to really go it alone."

The US is reviewing further reports on details of the reconciliation, and while it supports Palestinian reconciliation, Hamas remains "a terrorist organisation which targets civilians", Tommy Vietor, US National Security Council spokesman, said.

"To play a constructive role in achieving peace, any Palestinian government must accept the Quartet principles and renounce violence, abide by past agreements, and recognize Israel’s right to exist."

Hamas does not recognise Israel as a state.

'Bitter split'

Fatah holds power in the occupied West Bank while Hamas, which won the last parliamentary election in 2006, routed Abbas' forces in 2007 to seize control of the Gaza Strip.

Rawya Rageh, Al Jazeera's correspondent in Cairo, said: "This effectively will be ending a bitter split that Palestinians have been witnessing since 2007.

Rageh said the deal was expected to be signed next week and would be attended by Abbas and Hamas leader Khaled Meshaal, who is based in Damascus.

Nicole Johnston, Al Jazeera's correspondent in Gaza, said: "One of the main civil society groups here is calling on all Palestinian factions to head down to the main square in Gaza City, the square of the unknown soldier, to begin the celebrations.

"It seems certainly in Gaza that there's a need for some good news. It's been a pretty rough month here in a lot of respects, an escalation of violence with Israel, the kidnapping and murder of a foreigner.

"So really, this kind of news ... is a call for celebration."

Wednesday's accord was first reported by Egypt's intelligence service, which brokered the talks.

In a statement carried by Egyptian state news agency MENA, the intelligence service said the deal was agreed by a Hamas delegation led by Moussa Abu Marzouk, deputy head of the group's politburo, and Fatah central committee member Azzam al-Ahmad.

Al-Ahmad and Abu Marzouk said the agreement covered all points of contention, including forming a transitional government, security arrangements and the restructuring of the Palestine Liberation Organisation to allow Hamas to join it.

Speaking on Egyptian state television, al-Ahmad said a general election would take place within a year.

Mahmoud al-Zahar, a senior member of Hamas, said all prisoners with a non-criminal background would be released.